By James Kwak
So apparently a JPMorgan Chase analyst thinks that senators showed “an unnerving ignorance of fundamental principles of market economics.” Senator Charles Grassley went one better and showed an unnerving ignorance of how the government’s own budget works.
In a hearing on the administration’s proposal to recover the net costs of TARP through a tax on large banks, Grassley said,
“If a TARP tax is imposed and the money is simply spent, that doesn’t repay taxpayers one cent for TARP losses. It’s just more tax-and-spend big government, while taxpayers foot the bill for Washington’s out-of-control spending.”
Grassley apparently thinks that when the government “spends” money, it doesn’t benefit taxpayers. What does he think the government does? Burn it? Give it to Martians?
Apparently according to Grassley, if the government uses the bank tax to cut other taxes or to pay down the national debt, that would “repay taxpayers.” But if the government does any of the following, that is just taxpayers footing the bill for “out-of-control spending”:
- Pay for Medicare benefits.
- Pay for extended unemployment benefits.
- Subsidize student loans.
- Pay for veterans’ health care.
- Pay for soldiers fighting in Iraq and Afghanistan.
- Pay for Head Start teachers.
In 1, 2, 3, and 4, taxpayers get very concrete benefits by virtue of being old, unemployed, students, or veterans. In 5, the benefits are hard to quantify, but few people would say we should spend nothing on national security. I threw in 6 to be “balanced” — it’s something that most Republicans think the government should not be doing.
It is perfectly fine to have debates about the relative value of different forms of government spending. Some government spending counts as productive investments with a positive net present value (think of the interstate highway system, for example), some is pure transfer payments, and some is no doubt wasteful. But saying that when the government collects taxes and then spends tax revenues the people who paid those taxes get nothing in return is pure nonsense.
On the more important issue, I’m glad the administration is pressing for a large bank tax to recover the costs of TARP, because this will have the small effect of creating a disincentive to be large. But politically, it points out the problem with post-funding a bailout, which the administration favors. (The administration was against the Dodd plan to pre-fund future resolutions of large financial institutions.) The banks and their supporters are arguing that now is the wrong time to raise money from large banks, because that would crimp the economic recovery. This is precisely the reason why the funds should be raised before the crisis, during the boom.